See accompanying notes to financial statements.
See accompanying notes to financial statements.
See accompanying notes to financial statements.
See accompanying notes to financial statements.
See accompanying notes to financial statements.
Notes to Financial Statements
KKR Income Opportunities Fund (the Fund) was organized on March 17, 2011 as a statutory trust under the laws of the State of Delaware.
The Fund is a closed-end registered management investment company, which commenced operations on July 25, 2013. The Fund seeks to generate a high level of current income, with a secondary objective of capital appreciation. The Fund is
diversified for purposes of the Investment Company Act of 1940, as amended (the 1940 Act). KKR Credit Advisors (US) LLC serves as the Funds investment adviser (the Adviser).
2. |
Summary of Significant Accounting Policies |
Basis of Presentation The accompanying financial statements are presented in accordance with accounting principles generally accepted in
the United States of America (GAAP) and are stated in United States (U.S.) dollars. The Fund is an investment company following accounting and reporting guidance in Financial Accounting Standards Board Accounting Standards
Codification Topic 946, Financial Services Investment Companies. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in
these financial statements. Actual results could differ from those estimates.
Valuation of Investments The Board of Trustees (the
Board) of the Fund has adopted valuation policies and procedures to ensure investments are valued in a manner consistent with GAAP as required by the 1940 Act. The Board has delegated primary responsibility in ensuring these valuation
policies and procedures are followed, including those relating to fair valuation, to the Adviser.
Fair value is the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters, or derived from such prices or parameters.
Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or
market and the instruments complexity for disclosure purposes.
Assets and liabilities recorded at fair value on the Statement of Assets and
Liabilities are categorized based upon the level of judgment associated with the inputs used to measure their value. Hierarchical levels, as defined under GAAP, are directly related to the amount of subjectivity associated with the inputs to fair
valuations of these assets and liabilities, and are as follows:
Level 1 Inputs are unadjusted, quoted prices in active markets for
identical assets or liabilities at the measurement date.
The types of assets generally included in this category are common stocks listed in active
markets.
Level 2 Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or
indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability.
The types of assets and liabilities generally included in this category are high yield securities and certain leveraged loans.
Level 3 Inputs are unobservable for the asset or liability, and include situations where there is little, if any, market activity for the
asset or liability.
16
|
|
|
|
|
|
|
Income Opportunities Fund |
|
April 30, 2022
(Unaudited) |
|
|
|
|
The types of assets generally included in this category are certain leveraged loans, common stocks not
actively traded and preferred stocks not actively traded.
A significant decrease in the volume and level of activity for the asset or liability is
an indication that transactions or quoted prices may not be representative of fair value because in such market conditions there may be increased instances of transactions that are not orderly. In those circumstances, further analysis of
transactions or quoted prices is needed, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value.
The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors, including, for
example, the type of product, whether the product is new, whether the product is traded on an active exchange or in the secondary market, and the current market condition. To the extent that valuation is based on models or inputs that are less
observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Fund in determining fair value is greatest for instruments categorized in Level 3. In certain
cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is
determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Funds assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and
consideration of factors specific to the asset. The variability of the observable inputs affected by the factors described above may cause transfers between Levels 1, 2 and/or 3, which the Fund recognizes at the beginning of the period during which
the inputs change.
Many financial assets and liabilities have bid and ask prices that can be observed in the marketplace. Bid prices reflect the
highest price that the Fund and others are willing to pay for an asset. Ask prices represent the lowest price that the Fund and others are willing to accept for an asset. For financial assets and liabilities whose inputs are based on bid-ask prices,
the Fund does not require that fair value always be a predetermined point in the bid- ask range. The Funds policy is to allow for mid-market pricing and adjust to the point within the bid-ask range that meets the Funds best estimate of
fair value.
Depending on the relative liquidity in the markets for certain assets, the Fund may transfer assets to Level 3 if it determines that
observable quoted prices, obtained directly or indirectly, are not available.
Investments are generally valued based on quotations from third party
pricing services, unless such a quotation is unavailable or is determined to be unreliable or inadequately representing the fair value of the particular assets. In that case, valuations are based on either valuation data obtained from one or more
other third party pricing sources, including broker dealers selected by the Adviser, or will reflect the Valuation Committees good faith determination of fair value based on other factors considered relevant. For assets classified as Level 3,
valuations are based on various factors including financial and operating data of the company, company specific developments, market valuations of comparable companies and model projections.
Certain unfunded investments in delayed draw term loans and revolving lines of credit may at times be priced at less than par value resulting in a
financial liability in the Schedule of Investments. These values are temporary and the funding of the commitment will result in these investments valued as financial assets.
For the six months ended April 30, 2022, there have been no significant changes to the Funds fair value methodologies.
Investment Transactions Investment transactions are accounted for on the trade date, the date the order to buy or sell is
executed. Amortization and accretion is calculated using the effective interest method over the holding period of the investment. Realized gains and losses are calculated on the specific identified cost basis.
Cash and Cash Equivalents Cash and cash equivalents includes cash on hand, cash held in banks and highly liquid investments with original
maturities of three or fewer months. Cash equivalents consist solely of money
17
|
|
|
|
|
|
|
Income Opportunities Fund |
|
April 30, 2022
(Unaudited) |
|
|
|
|
market funds with financial institutions. As of April 30, 2022, the Fund was invested in the Morgan Stanley Institutional Liquidity Government Portfolio Institutional Class.
Foreign Currency Transactions The books and records of the Fund are maintained in U.S. dollars. All investments denominated in foreign
currency are converted to the U.S. dollar using prevailing exchange rates at the end of the reporting period. Income, expenses, gains and losses on investments denominated in foreign currency are converted to the U.S. dollar using the prevailing
exchange rates on the dates when the transactions occurred.
The Fund bifurcates that portion of the results of operations resulting from changes in
foreign exchange rates on investments and interest from the fluctuations arising from changes in market prices of securities held.
Distributions
to Shareholders Distributions are declared and paid monthly and distributable net realized capital gains, if any, are declared and distributed at least annually. Distributions to shareholders are recorded on the ex-dividend date.
Term Loan Income Term Loan Income consists of transaction fees including, but not limited to, assignment, transfer, administration and
amendment fees. Fee and other income is recorded when earned, and is recognized in Other income on the Statement of Operations.
Income Taxes
The Fund has elected to be treated and has qualified, and intends to continue to qualify in each taxable year, as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended, and in
conformity with the Regulated Investment Company Modernization Act of 2010. The Fund will not be subject to federal income tax to the extent the Fund satisfies the requirements under Section 851 of the Internal Revenue Code, including
distributing all of its gross investment company taxable income and capital gains to its shareholders based on the Funds fiscal year end of October 31.
To avoid imposition of a 4.00% excise tax on undistributed income applicable to regulated investment companies, the Fund intends to declare each year as
dividends in each calendar year at least 98.00% of its net investment income (earned during the calendar year) and 98.20% of its net realized capital gains (earned during the twelve months ended October 31) plus undistributed amounts, if any,
from prior years.
The Fund evaluates tax positions taken or expected to be taken in the course of preparing the Funds tax returns to determine
whether it is more-likely-than-not (i.e., greater than 50.00%) that each tax position will be sustained upon examination by a taxing authority based on the technical merits of the position. Tax positions not deemed to meet the
more-likely-than-not threshold are recorded as a tax benefit or expense in the current year. Management has analyzed the Funds tax positions and has concluded that no liability for unrecognized tax benefits should be recorded related to
uncertain tax positions for the open tax years (2018-2021). However, managements conclusions regarding tax positions taken may be subject to review and adjustment at a later date based on factors including, but not limited to, examination by
tax authorities, on-going analysis of and changes to tax laws, regulations and interpretations thereof.
As of April 30, 2022, the Fund did not
have a liability for any unrecognized tax benefits. The Fund recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the Statement of Operations. During the six months ended April 30, 2022, the
Fund did not incur any interest or penalties.
18
|
|
|
|
|
|
|
Income Opportunities Fund |
|
April 30, 2022
(Unaudited) |
|
|
|
|
The Fund invests mainly in leveraged loans, high yield securities, common stocks not actively traded and preferred stocks. These investments may involve
certain risks, including, but not limited to, those described below:
COVID-19 and Global Economic and Market Conditions The Fund is
materially affected by market, economic and political conditions and events, such as natural disasters, epidemics and pandemics, wars, supply chain disruptions, economic sanctions, globally and in the jurisdictions and sectors in which it invests or
operates, including factors affecting interest rates, the availability of credit, currency exchange rates and trade barriers. For example, COVID-19 has adversely impacted, and any future outbreaks could adversely impact, the markets and economy in
general, including the companies in which the Fund invests, and could harm Fund performance. Epidemics and pandemics, such as the COVID-19 outbreak, have and may further result in, among other things, travel restrictions, closure of international
borders, certain businesses and securities markets, restrictions on securities trading activities, quarantines, supply chain disruptions and reduced consumer demand, as well as general concern and uncertainty. The COVID-19 outbreak has had, and will
continue to have, a material adverse impact on the global economy, including the U.S. economy, as cross border commercial activity and market sentiment have been negatively impacted by the outbreak and government and other measures seeking to
contain its spread. Market, economic and political conditions and events are outside the Advisers control and could adversely affect the liquidity and value of the Funds investments and reduce the ability of the Fund to make attractive
new investments.
Market Discount Risk The price of the Funds common shares of beneficial interest will fluctuate with market conditions
and other factors. Shares of closed-end management investment companies frequently trade at a discount from their net asset value, which may increase the risk of loss.
Leverage Risk Leverage is a speculative technique that may expose the Fund to greater risk and increased costs. When leverage is used, the net
asset value and market price of the Funds shares and the Funds investment return will likely be more volatile.
Market Risk Bond
markets rise and fall daily. As with any investment with performance tied to these markets, the value of an investment in the Fund will fluctuate, which means that shareholders could lose money.
Interest Rate Risk Interest rates will rise and fall over time. During periods when interest rates are low, the Funds yield and total return
also may be low. Changes in interest rates also may affect the Funds share price and a sharp rise in interest rates could cause the Funds share price to fall. The longer the Funds duration, the more sensitive to interest rate
movements its share price is likely to be.
Credit Risk The Fund is subject to the risk that a decline in the credit quality of an investment
could cause the Fund to lose money or underperform. The Fund could lose money if the issuer or guarantor of an investment fails to make timely principal or interest payments or otherwise honor its obligations.
Liquidity Risk A particular investment may be difficult to purchase or sell. The Fund may be unable to sell illiquid securities at an advantageous
time or price.
Prepayment and Extension Risk The Funds investments are subject to the risk that the investments may be paid off earlier
or later than expected. Either situation could cause the Fund to hold investments paying lower than market rates of interest, which could hurt the Funds yield or share price.
19
|
|
|
|
|
|
|
Income Opportunities Fund |
|
April 30, 2022
(Unaudited) |
|
|
|
|
High Yield Risk High yield securities and unrated securities of similar credit quality (sometimes
called junk bonds) that the Fund may invest in are subject to greater levels of credit and liquidity risks. High yield securities are considered primarily speculative with respect to the issuers continuing ability to make principal and
interest payments.
Foreign Investment Risk The Funds investments in securities of foreign issuers may involve certain risks that are
greater than those associated with investments in securities of U.S. issuers. These include risks of adverse changes in foreign economic, political, regulatory and other conditions; changes in currency exchange rates (the currencies will decline in
value relative to the U.S. dollar or, in the case of hedging positions, the U.S. dollar will decline in value relative to the currency being hedged) or exchange control regulations (including limitations on currency movements and exchanges);
differing accounting, auditing, financial reporting and legal standards and practices; differing securities market structures; and higher transaction costs. These risks may be heightened in connection with investments in emerging markets.
Issuer Risk The value of securities may decline for a number of reasons that directly relate to the issuer, such as its financial strength,
management performance, financial leverage and reduced demand for the issuers goods and services, as well as the historical and prospective earnings of the issuer and the value of its assets.
Investment Advisory Agreement The Adviser provides day-to-day portfolio management services to the Fund and has discretion to
purchase and sell investments in accordance with the Funds objectives, policies, and restrictions. For the services it provides to the Fund, the Adviser receives an annual fee, payable monthly by the Fund, in an amount equal to 1.10% of the
Funds average daily Managed Assets (the Investment Advisory Fee). Managed Assets means the total assets of the Fund (including any assets attributable to borrowings for investment purposes) minus the sum of the
Funds accrued liabilities (other than liabilities representing borrowings for investment purposes).
During periods when the Fund is using
leverage, the Investment Advisory Fee paid to the Adviser will be higher than if the Fund does not use leverage because the Investment Advisory Fee paid is calculated based on the Funds Managed Assets, which includes the assets purchased
through leverage.
During the six months ended April 30, 2022, the Adviser earned an Investment Advisory Fee of $2.9 million.
Administrator, Custodian and Transfer Agent U.S. Bancorp Fund Services, LLC (Fund Services or Administrator), doing
business as U.S. Bank Global Fund Services, serves as the Funds administrator pursuant to an administration agreement under which the Administrator provides administrative and accounting services.
U.S. Bank N.A. (the Custodian) serves as the Funds custodian pursuant to a custody agreement. The Custodian is an affiliate of Fund
Services.
Fund Services serves as the Funds transfer agent pursuant to a transfer agency agreement.
Deferred Trustees Compensation The Fund has a Deferred Trustees Compensation plan (the Plan) that allows the
Independent Trustees to defer compensation to a future payment period. The compensation is invested in shares of the Fund. The value of a participating Independent Trustees deferral account is based on the shares of deferred amounts as
designated by the participating Independent Trustees. Changes in the value of the Independent Trustees deferral account are included in the Statement of Operations. The accrued obligations under the Plan, including unrealized appreciation
(depreciation), are included on the Statement of Assets and Liabilities.
Other Certain officers of the Fund are also officers of the
Adviser. Such officers are paid no fees by the Fund for serving as officers of the Fund.
20
|
|
|
|
|
|
|
Income Opportunities Fund |
|
April 30, 2022
(Unaudited) |
|
|
|
|
The following table presents information about the Funds assets measured at fair value on a recurring basis as of April 30, 2022, and
indicates the fair value hierarchy of the inputs utilized by the Fund to determine such fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
|
|
|
Leveraged loans |
|
$ |
|
|
|
$ |
217,011,491 |
|
|
$ |
11,308,526 |
|
|
$ |
228,320,017 |
|
|
|
|
|
|
High yield securities |
|
|
|
|
|
|
244,669,117 |
|
|
|
1,270,000 |
|
|
|
245,939,117 |
|
|
|
|
|
|
Preferred stocks |
|
|
|
|
|
|
|
|
|
|
409,047 |
|
|
|
409,047 |
|
|
|
|
|
|
Common stocks |
|
|
3,148,381 |
|
|
|
|
|
|
|
4,925,155 |
|
|
|
8,073,536 |
|
|
|
|
|
|
Cash equivalents |
|
|
6,163,322 |
|
|
|
|
|
|
|
|
|
|
|
6,163,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9,311,703 |
|
|
$ |
461,680,608 |
|
|
$ |
17,912,728 |
|
|
$ |
488,905,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following are the details of the restricted securities held by the Fund:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer |
|
Asset |
|
Par/Shares |
|
|
Cost |
|
|
Fair Value |
|
|
Acquisition Date |
|
|
% of Net Assets |
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foresight Energy LLC |
|
Common Stock |
|
|
320,381 |
|
|
$ |
3,568,044 |
|
|
$ |
4,515,459 |
|
|
|
6/30/2020 |
|
|
|
1.48% |
|
|
|
|
|
|
|
|
CTI Foods Holding Co LLC |
|
Common Stock |
|
|
955 |
|
|
|
112,798 |
|
|
|
|
|
|
|
5/3/2019 |
|
|
|
0.00% |
|
|
|
|
|
|
|
|
Leveraged Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sequa Corp |
|
TL 1L 07/20 |
|
|
5,745,343 |
|
|
|
5,594,808 |
|
|
|
5,754,938 |
|
|
|
7/31/2020 |
|
|
|
1.89% |
|
|
|
|
|
|
|
|
Sequa Corp |
|
TL 2L 07/20 |
|
|
17,878,559 |
|
|
|
18,015,390 |
|
|
|
17,824,924 |
|
|
|
7/31/2020 |
|
|
|
5.86% |
|
|
|
|
|
|
|
|
Yak Access LLC |
|
TL 1L B 05/18 |
|
|
5,792,935 |
|
|
|
5,630,798 |
|
|
|
5,035,769 |
|
|
|
6/29/2018 |
|
|
|
1.65% |
|
|
|
|
|
|
|
|
Belk Inc |
|
TL 1L 02/21 |
|
|
459,875 |
|
|
|
454,814 |
|
|
|
454,701 |
|
|
|
2/24/2021 |
|
|
|
0.15% |
|
|
|
|
|
|
|
|
Belk Inc |
|
TL 1L EXIT 02/21 |
|
|
8,232,031 |
|
|
|
5,132,608 |
|
|
|
4,916,087 |
|
|
|
2/24/2021 |
|
|
|
1.62% |
|
|
|
|
|
|
|
|
Foresight Energy LLC |
|
TL 1L A 06/20 |
|
|
2,191,606 |
|
|
|
2,191,606 |
|
|
|
2,191,606 |
|
|
|
6/30/2020 |
|
|
|
0.72% |
|
|
|
|
|
|
|
|
Excelitas Technologies Corp |
|
TL 2L 10/17 |
|
|
11,291,720 |
|
|
|
11,297,070 |
|
|
|
11,327,007 |
|
|
|
11/17/2017 |
|
|
|
3.72% |
|
|
|
|
|
|
|
|
ScionHealth |
|
TL 1L B 12/21 |
|
|
1,742,513 |
|
|
|
1,626,020 |
|
|
|
1,533,411 |
|
|
|
12/17/2021 |
|
|
|
0.50% |
|
|
|
|
|
|
|
|
Learning Care Group Inc |
|
TL 1L B 05/20 |
|
|
1,272,151 |
|
|
|
1,249,265 |
|
|
|
1,284,872 |
|
|
|
5/21/2020 |
|
|
|
0.42% |
|
|
|
|
|
|
|
|
Learning Care Group Inc |
|
TL 2L 03/18 |
|
|
124,840 |
|
|
|
121,958 |
|
|
|
124,060 |
|
|
|
2/11/2021 |
|
|
|
0.04% |
|
|
|
|
|
|
|
|
Trade Claim |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quorum Health Corp |
|
|
3,964,000 |
|
|
|
1,871,035 |
|
|
|
365,481 |
|
|
|
7/7/2020 |
|
|
|
0.12% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
$ |
56,866,214 |
|
|
$ |
55,328,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Refer to the Schedule of Investments for more details on securities listed. |
21
|
|
|
|
|
|
|
Income Opportunities Fund |
|
April 30, 2022
(Unaudited) |
|
|
|
|
The following is a reconciliation of the investments in which significant unobservable inputs (Level 3)
were used in determining value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leveraged Loans |
|
|
High Yield Securities |
|
|
Preferred Stocks |
|
|
Common Stocks |
|
|
|
|
|
|
Balance as of October 31, 2021 |
|
$ |
9,485,763 |
|
|
$ |
|
|
|
$ |
409,050 |
|
|
$ |
4,697,082 |
|
|
|
|
|
|
Transfer into Level 3 |
|
|
|
|
|
|
1,271,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases |
|
|
1,906,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and paydowns |
|
|
(21,523 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlements |
|
|
12,190 |
|
|
|
4,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in (depreciation)/appreciation |
|
|
(75,096 |
) |
|
|
(5,249 |
) |
|
|
(3 |
) |
|
|
228,073 |
|
|
|
|
|
|
Net realized gains |
|
|
298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of April 30, 2022 |
|
$ |
11,308,526 |
|
|
$ |
1,270,000 |
|
|
$ |
409,047 |
|
|
$ |
4,925,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in (depreciation)/appreciation on investments held at April 30, 2022 |
|
$ |
(85,855 |
) |
|
$ |
(5,249 |
) |
|
$ |
(3 |
) |
|
$ |
228,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents additional information about valuation techniques and inputs used for investments that are
measured at fair value and categorized within Level 3 as of April 30, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Asset |
|
Fair Value |
|
|
Valuation Technique(1) |
|
Unobservable Inputs(2) |
|
Range
(Weighted Average)(3) |
|
|
|
|
|
|
Leveraged Loans |
|
$ |
11,308,526 |
|
|
Yield Analysis |
|
Yield |
|
|
9% -11% (10%) |
|
|
|
|
|
|
|
|
|
Discount Margin |
|
|
3% - 4% (4%) |
|
|
|
|
|
|
|
|
|
EBITDA Multiple |
|
|
2.0x - 13.5x (10.0x) |
|
|
|
|
|
|
|
|
|
Net Leverage |
|
|
0.3x - 7.6x (5.5x) |
|
|
|
|
|
|
Common Stocks |
|
$ |
4,925,155 |
|
|
Market Comparables |
|
FWD EBITDA |
|
|
2.0x - 11.4x (2.1x) |
|
|
|
|
|
|
|
|
|
Illiquidity Discount |
|
|
15% - 20% (15%) |
|
|
|
|
|
|
|
Discounted Cash Flows |
|
WACC |
|
|
25% |
|
|
|
|
|
|
High Yield Securities |
|
$ |
1,270,000 |
|
|
Yield Analysis |
|
Yield |
|
|
8% |
|
|
|
|
|
|
|
|
|
Discount margin |
|
|
1% |
|
|
|
|
|
|
|
|
|
EBITDA multiple |
|
|
13.1x |
|
|
|
|
|
|
|
|
|
Net leverage |
|
|
10.7x |
|
|
|
|
|
|
Preferred Stocks |
|
$ |
409,047 |
|
|
Market Comparables |
|
LTM Revenue |
|
|
12.5x |
|
|
|
|
|
|
|
|
|
Illiquidity Discount |
|
|
20% |
|
|
|
|
|
|
|
|
|
FWD EBITDA |
|
|
11.4x |
|
(1) |
For the assets that have more than one valuation technique, the Fund may rely on the techniques individually or in
aggregate based on a weight ascribed to each one ranging from 0.00%-100.00%. When determining the weighting ascribed to each valuation methodology, the Fund considers, among other factors, the availability of direct market comparables, the
applicability of a discounted cash flow analysis and the expected hold period and manner of realization for the investment. These factors can result in different weightings among the investments and in certain instances, may result in up to a
100.00% weighting to a single methodology. |
(2) |
The significant unobservable inputs used in the fair value measurement of the Funds assets and liabilities may
include the last twelve months (LTM) EBITDA multiple, weighted average cost of capital, discount margin, probability of default, loss severity and constant prepayment rate. In determining certain of these inputs, management evaluates a
variety of factors including economic, industry and market trends and |
22
|
|
|
|
|
|
|
Income Opportunities Fund |
|
April 30, 2022
(Unaudited) |
|
|
|
|
|
developments, market valuations of comparable companies, and company specific developments including potential exit strategies and realization opportunities. Significant increases or decreases in
any of these inputs in isolation could result in significantly lower or higher fair value measurement. |
(3) |
Weighted average amounts are based on the estimated fair values. |
6. |
Investment Transactions |
The cost of investments purchased and the proceeds from the sale of investments, other than short-term investments, for the six months ended
April 30, 2022 were as follows:
|
|
|
|
|
Purchases |
|
$ |
96,581,335 |
|
|
|
Sales |
|
$ |
89,318,363 |
|
There were no purchases or sales of U.S. Government
securities.
7. |
Commitments and Contingencies |
The Fund may enter into certain credit agreements, of which all or a portion may be unfunded. The Fund had no unfunded commitments as of April 30,
2022.
Under the Funds organizational documents, its officers and Trustees are indemnified against certain liabilities arising out of the
performance of their duties to the Fund. In the normal course of business, the Fund enters into contracts that contain a variety of representations that provide general indemnifications. The Funds maximum liability exposure under these
arrangements is unknown, as future claims that have not yet occurred may be made against the Fund. However, based on experience, management expects the risk of loss to be remote.
The timing and characterization of certain income, capital gains, and return of capital distributions are determined annually in accordance with federal
tax regulations, which may differ from GAAP. As a result, the net investment income and net realized gains (losses) on investment transactions for a reporting period may differ significantly from distributions during such period. These book to tax
differences may be temporary or permanent in nature. To the extent these differences are permanent, they are charged or credited to paid-in capital, accumulated net investment income or accumulated net realized gains (losses), as appropriate, in the
period in which the differences arise.
As of October 31, 2021, the following permanent differences have been reclassified (to)/from the following
accounts:
|
|
|
|
|
Undistributed Net
Investment Income |
|
Accumulated
Net Realized Loss |
|
Paid-in
Capital |
|
|
|
$182,810 |
|
$(33,226) |
|
$(149,584) |
The tax character of distributions declared for the year ended October 31, 2021 and the six months ended April 30,
2022, were as follows:
|
|
|
|
|
|
|
|
|
|
|
Ordinary Income |
|
|
Total |
|
|
|
|
October 31, 2021 |
|
$ |
25,628,796 |
|
|
$ |
25,628,796 |
|
|
|
|
April 30, 2022* |
|
$ |
12,814,398 |
|
|
$ |
12,814,398 |
|
* |
The final tax character of any distribution declared during the six months ended April 30, 2022 will be determined
in January 2023 and reported to shareholders on IRS Form 1099-Div in accordance with federal income tax regulations. |
23
|
|
|
|
|
|
|
Income Opportunities Fund |
|
April 30, 2022
(Unaudited) |
|
|
|
|
As of October 31, 2021, the components of accumulated losses on a tax basis for the Fund are as follows:
|
|
|
|
|
|
|
Undistributed
Ordinary Income |
|
Net
Unrealized Appreciation |
|
Other
Temporary Differences |
|
Total
Accumulated Losses |
|
|
|
|
$3,694,270 |
|
$815,095 |
|
$(25,436,375) |
|
$(20,927,010) |
Net capital losses earned may be carried forward indefinitely and must retain the character of the original loss. During
the year ended October 31, 2021, the Fund utilized capital loss carry-forwards of $13.4 million. As of October 31, 2021, the Fund had non-expiring capital loss carry-forwards of $24.2 million.
As of October 31, 2021, the total cost of securities for federal income tax purposes and the aggregate gross unrealized appreciation and depreciation for
securities held by the Fund are as follows:
|
|
|
|
|
|
|
Federal To
Cost |
|
Aggregate
Gross Unrealized
Appreciation |
|
Aggregate
Gross Unrealized
Depreciation |
|
Net
Unrealized Appreciation |
|
|
|
|
$517,805,317 |
|
$13,853,096 |
|
$(13,038,001) |
|
$815,095 |
In October 2019, the Fund entered into a credit agreement (the State Street Credit Facility) with State Street Bank and Trust Company
(State Street). The State Street Credit Facility provides for loans to be made in U.S. dollars and certain foreign currencies to an aggregate amount of $160.0 million, with an accordion feature that allows the Fund, under
certain circumstances, to increase the size of the facility to a maximum of $225.0 million. The Fund may reduce or terminate the commitments under the State Street Credit Facility with three business days notice. State Street is required to
provide the Fund with 270 days notice prior to terminating the State Street Credit Facility.
Prior to December 30, 2021, interest on the
State Street Credit Facility was generally based on the London Interbank Offered Rate (LIBOR), or with respect to borrowings in foreign currencies, on a base rate applicable to such currency borrowing, plus a spread of 0.75%. On
December 30, 2021, the Fund amended the State Street Credit Facility to replace the LIBOR with the Secured Overnight Financing Rate and added an additional spread adjustment of 0.12%-0.33% for borrowings denominated in the British pound. The
Fund also pays a commitment fee on any unused commitment amounts between 0.15% and 0.25%, depending on utilization levels. As of April 30, 2022, the Fund was in compliance with the terms of the State Street Credit Facility.
The components of interest expense, average interest rates (i.e., base interest rate in effect plus the spread) and average outstanding balances for the
Funds credit facilities for the six months ended April 30, 2022 were as follows:
|
|
|
|
|
|
|
Stated interest expense |
|
$ |
590,418 |
|
|
|
Unused commitment fees |
|
|
11,611 |
|
|
|
|
|
|
Total interest expense |
|
$ |
602,029 |
|
|
|
|
|
|
|
|
Weighted average interest rate |
|
|
0.83 |
% |
|
|
Average borrowings |
|
$ |
142,189,560 |
|
24
|
|
|
|
|
|
|
Income Opportunities Fund |
|
April 30, 2022
(Unaudited) |
|
|
|
|
10. |
Mandatorily Redeemable Preferred Shares |
On October 15, 2019, the Fund issued 10-year mandatorily redeemable preferred shares (the MRPS). The Fund authorized and issued
2.0 million MRPS with a total liquidation value of $50.0 million. The final redemption date of the MRPS is October 31, 2029. The Fund makes quarterly dividend payments on the MRPS at an annual dividend rate of 3.81%. The fair value of MRPS
approximates its par value as of April 30, 2022. This fair value is based on Level 2 inputs under the fair value hierarchy.
Offering costs
incurred in connection with the issuance of MRPS have been recorded, and are being deferred and amortized through the final redemption date of the MRPS. The amortization of these costs is included in preferred shares interest expense in the
Statement of Operations.
25
|
|
|
|
|
|
|
Income Opportunities Fund |
|
April 30, 2022
(Unaudited) |
|
|
|
|